FHA Loan

What it is

An FHA loan is a mortgage backed by the Federal Housing Administration. Down payment is 3.5% for qualified borrowers. Owner-occupied — you have to actually live in the house. In exchange for the low down payment and looser credit requirements, you pay mortgage insurance premiums until you refinance out.

The 203k variant rolls rehab costs into the mortgage. The lender orders a scope of work and contractor bids, then disburses funds in draws as the renovation completes. It’s how a first-time buyer gets into a house that wouldn’t qualify for a standard mortgage because the condition is too rough.

I bought my first property with an FHA loan in 2011. Then in 2013 when I moved to Denver, I used FHA again — this time with a 203k construction rider — on a triplex for $500K plus $50K in rehab, all wrapped into the 3.5% down. Lived in one of the three units.

Why it matters

The FHA loan is the most powerful tool a first-time flipper has, and almost nobody uses it correctly. 3.5% down on a $200K house is $7,000 of cash plus closing costs. Compare that to hard money at 25-30% down on acquisition plus 100% of rehab out of pocket.

This is Step 1 of the path I teach. Primary residence flip, live in it two years, take the first $250K of profit tax-free under Section 121, repeat. You’re flipping and house hacking at the same time, with the government subsidizing your cost of capital. The only catch is the occupancy requirement — one owner-occupied FHA at a time, and you have to actually move in. For a single person or young couple with no kids locked to a school district, that’s not much of a constraint.

The most common mistake is skipping this step to go straight to investment loans. I watch new flippers pay 15 points and 12% interest on hard money for their first deal because “that’s what real flippers do.” Their first flip, they had a 3.5% down payment and two tax-free years sitting on the table and they ignored it.

How it shows up

The 203k is more useful than most people realize. Banks won’t lend on a house without working kitchens, bathrooms, or utilities on a standard mortgage. 203k does. The houses in the barely bankable range — the ones that scare off traditional buyers — become financeable for an owner-occupant. The tradeoff is paperwork: licensed contractors only, HUD consultant requirements, draw schedule. Slower than cash, but if you don’t have cash, the paperwork is the price of admission.

One thing I learned from using it: those 203k-certified general contractors know they’re the only game in town and they price accordingly. The certified list is small and they’ve learned they can take advantage of people who don’t know how to scope a rehab. Go in with your own scope of work already written. Don’t let the contractor write the scope for you — they’ll pick the most profitable jobs, not the ones that maximize your value increase.

Related

barely bankable, house hacking, miy method, hard money, duplex, section 121